Alibaba Has 1 Monster Hidden Asset
Alibaba (NYSE: BABA) has taken steps that could revive an IPO of its Ant Group holding. Its previous attempt to bring the company public fetched an enormous valuation. Though its IPO was pulled off the table, Alibaba still owns a significant interest in the valuable company. Here's what's happening now.
Hidden gem
Ant Group operates a digital payment app branded as Alipay. The company was founded by Jack Ma, who also founded Alibaba. Alipay's 1.3 billion users transact on Alibaba's e-commerce websites and anywhere mobile payments are accepted. The app also allows users to access its money market fund, its buy now, pay later service, and online banking. Alibaba owns 33% of Ant Group.
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In 2020, Ant planned to IPO as a stand-alone company, which would've valued the fast-growing company at over $300 billion. At that time, Ant Group would've been larger than U.S. banks Wells Fargo and Goldman Sachs.
Unfortunately for Ant shareholders, the IPO was scrapped at the last minute by the Chinese government, which began to issue sweeping regulations on Chinese tech companies, like Ant, that performed financial services but were not regulated like financial institutions. Many Chinese stocks, including Alibaba, began a precipitous fall. Alibaba shares fell from over $300 per share in October 2020 to their current price of around $90.
Recently, however, the People's Bank of China has accepted an application from Ant to form a financial holdings company. Their acceptance of the application could indicate that Ant is now in compliance with regulations and could set the stage for another attempt at an IPO.
At the center of the controversy is former CEO and founder Ma. The charismatic figure owns 50.52% ofAnt Group and a controlling share of many of Alibaba's other subsidiaries. The Wall Street Journal reported that Ma plans to relinquish control of Ant Group. In doing so, regulators may no longer see Alibaba and Ant as having common control, and Chinese regulators may favorably view an Ant Group IPO.
Is Alibaba stock a buy right now?
If Ant Group is worth over $300 billion, which it was valued at before its ill-fated IPO, Alibaba's one-third stake would be worth about $100 billion. On top of that, Alibaba's primary businesses include its popular e-commerce platform and rapid-growth cloud business, which holds 5% of the global cloud market.
Altogether, Alibaba pulled in $9.7 billion of net income in its year ended March 31, 2022. So, using its five-year average P/E ratio of 32 times as a proxy, Alibaba should be worth $310 billion. Adding the company's $100 billion stake in Ant Group would bring Alibaba's total value to approximately $410 billion. Alibaba's current market cap is only $275 billion, which may represent a significant value opportunity to shareholders.
Chinese fintech regulation was one cause of the share price's decimation, but it would appear those issues are behind the company. Shareholders are now grappling with a potential delisting of Alibaba shares from American stock exchanges. The problem with delisting is that many large institutional investment companies cannot hold shares of companies not listed on a major exchange.
Many of those investors may already be out of the stock, presenting an opportunity for individual investors able to hold shares if they move to the OTC markets or foreign exchanges. An IPO of Ant Group may be a catalyst for the market to recognize Alibaba shares' hidden value, potentially keeping it from being delisted.
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